NZD/USD flat on the day in the 0.6460s pre-Fed minutes releases after hawkish RBNZ-induced volatility

• NZD/USD is flat but has swung within a 100 pip 0.6410-0.6510ish range on Wednesday.
• The pair has been buffeted by a hawkish RBNZ policy announcement, a strong buck but weaker than expected US data.
• Ahead, focus returns to the Fed with the minutes of the May meeting scheduled for release and Fed’s Brainard speaking.

NZD/USD gyrated with a 100 pip, 0.6410-0.6510ish range on Wednesday, initially boosted following a 50 bps rate hike and hawkish rate guidance from the RBNZ during Asia Pacific trade, only to be knocked back from highs amid a rebound from monthly lows in the US dollar. At current levels, the pair is trading flat on the day in the 0.6460s, though holds on to gains on the week of about 1.0%.

To recap the recent RBNZ meeting, the bank raised interest rates from 1.5% to 2.0% as expected, but delivered much more hawkish rate guidance than forecast, predicting rates would end the year at 3.4% and rise as high as 3.95% by next September. That was a big jump from the bank’s previous forecast that rates would reach 2.2% by the end of this year and 3.4% by next September.

RBNZ Governor Adrian Orr’s commentary was suitably hawkish. He pledged that the committee would continue raising interest rates until they reach a level where the bank is confident that inflationary pressures will be brought under control, after which rates might then be able to fall back a little. For what it's worth, economic consultancy Capital Economics said on Wednesday that they think the RBNZ’s aggressive tightening cycle will tip the New Zealand housing market into a downturn, and the RBNZ will end up cutting rates by the middle of 2023.

Back to Wednesday’s price action; dip-buying has been attributed as behind the US dollar’s comeback on Wednesday after the DXY hit its lowest levels in nearly a month on Tuesday under 102.00. However, the buck has been knocked back a touch from earlier highs in wake of weaker than expected US Durable Goods Orders data for April. Analysts said the data showed a moderation of business investment at the start of Q2 probably as a result of hawkish Fed-induced tighter financial conditions.  

Speaking of, the main drivers for NZD/USD for the rest of the session will be remarks from Fed Vice Chair Lael Brainard from 1615GMT and then the release of the minutes from this month’s Fed meeting at 1800GMT. The minutes are expected to show strong support on the FOMC for Fed Chair Jerome Powell’s plans to lift rates expeditiously to neutral by the end of this year, with traders likely most interest in any difference of opinion on what should come next.

Should the Fed pause and reassess, or continue hiking interest rates in order to tame inflation? Any preference towards the latter could see the buck supported, which might send NZD/USD back to the lower 0.6400s, where bears would then eye a test of the 21-Day Moving Average in the 0.6390s just below it.